COVID-19 to cause significant shrinkage in emerging economies, lockdowns make situation worse: EBRD

Doaa A.Moneim , Thursday 9 Apr 2020

The economic impact of the coronavirus pandemic may only be comparable to the disruption of World War II, the EBRD has said

European Bank for Reconstruction and Development (EBRD) (Reuters)

The Covid-19 global pandemic will cause a significant shrinkage in output across emerging economies, according to a European Bank for Reconstruction and Development (EBRD) report issued Wednesday. A swift recovery, while possible, is not guaranteed, according to the report.

The extent of the shrinkage and the speed of recovery will depend mainly on the duration of measures to contain the virus, expected to result in the greatest disruption to global economic activity since World War II, according to the report.

In the longer term, according to the EBRD, the coronavirus crisis may lead to reassessing the risks of concentration in global manufacturing, and could lead to a new emphasis on diversification and new business opportunities for companies in the EBRD regions.

“Even before the onset of the deadly virus, economic growth in the EBRD regions had been easing as a result of a slowdown in global expansion and moderating global trade growth.

Further, the Covid-19 pandemic hit on top of this deceleration and is expected to result in a substantial output contraction, at least in the near term,” the EBRD report said.

Under the EBRD’s central scenario, restrictions on cross-border and domestic activity are assumed to last for several months, with a gradual relaxation and a return to normality during the second half of the year. If this is the case, output in EBRD regions is likely to contract in 2020, with growth resuming after lockdowns are eased, the report expected.

“If lockdowns remain in place for much longer, the economic impact will be significantly deeper. Prolonged quarantines and extended closures of schools and businesses may result in substantial loss of production capacity,” the report warned.

It added that this would have a negative impact on the potential rate of medium-term growth and may result in deep structural damage to consumer service industries, such as airlines, cinemas and restaurants, although others, including food deliveries, may benefit, adding that lockdowns would also impose a large fiscal cost and result in sharp increases in public debt.

“Those new levels of debt may be affordable in some countries because of very low real interest rates but other ecoanomies may face binding fiscal constraints,” the report assessed.

The report also pointed out the external shocks affecting the EBRD regions include a sharp drop in commodity prices, which will weigh on the economies of commodity exporters, disruption to global value chains, a collapse in tourism and a drop in remittances.

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